The current Deutschmark zone can be characterised as a currency area with very similar monetary conditions and a common monetary policy led by the Deutsche Bundesbank. The introduction of the single European currency shall lead to a currency union with a monetary policy led by the European Central Bank. Such a currency union is beneficial, if it reduces the costs of financial transactions. These costs are mainly policy determined and depend to a large extent on the integration of financial markets and the focus of monetary policy. Monetary policy in the European Union will be subject to the autonomy of the European Central Bank and the stability preferences in EMU countries. The legal framework and the policy concepts of the European Central Bank mirror the model Deutsche Bundesbank. Therefore the institutional preconditions for a low inflation monetary policy are relatively good. However, the European Central Bank needs stricter safeguards as she will pursue her policy in an environment with probably weaker stability preferences as in the case of the Deutsche Bundesbank. A European Monetary System II has been proposed between Euro and the remaining EU currency, with a structure very similar to the current EMS I. The designated innovations should reduce the dangers, that the European Central Bank can not pursue its goal of price level stability in the fixed exchange rate system.
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Article provided by Department of Economics, Economics I, Bayreuth University in its journal ORDO.